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Discharging student loans in a personal bankruptcy

Most college students in North Carolina and around the country will be in debt to the tune of thousands of dollars when they enter the workplace, and many of them will find it extremely difficult to make their required monthly payments. The nation's bankruptcy code was revised in 2005 to make student loan debt nondischargeable in most bankruptcy cases, but there is an exception to this general rule when continuing to make payments would impose an undue hardship on the petitioner.

However, lawmakers chose to not clearly define what an 'undue hardship" is when they drafted the Bankruptcy Abuse Prevention and Consumer Protection Act, so deciding what the nebulous term actually means has been left to the courts. The Department of Education is working to develop a nationwide standard, but most courts currently apply what is referred to as the Brunner test to make these decisions. In 2016, the Fourth Circuit ruled that bankruptcy courts in North Carolina must apply the Brunner test.

Passing the Brunner test involves meeting three distinct criteria. Bankruptcy petitioners must demonstrate that paying their required monthly bills prevents them from maintaining even a minimal standard of living. They must also establish that their situations are unlikely to improve significantly in the future and are required to provide judges with evidence demonstrating the good faith efforts they have made to meet their obligations.

One of the many myths surrounding bankruptcy is that student loan debt cannot be included. Attorneys who have experience with debt relief could explain what debts can and cannot be discharged in a bankruptcy and clear up confusion over the differences between Chapter 7 and Chapter 13 petitions. Lawyers could also explain how filing a bankruptcy generates an automatic stay that puts a stop to harassment from bill collectors.

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